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DF-663 12/14/83
Memorandum 84-9
Subject: Study F-663 - Division of Pensions (Policy Issues)
BACKGROUND
At the November 1983 meeting the Commission directed the staff to
prepare for its consideration a tentative recommendation (with the view
to distributing the tentative recommendation for comment if it appears
to be a reasonable solution to the problem of division of pensions)
along the following lines:
The court at dissolution of marriage should be authorized to divide the community property retirement benefits when they contractually become payable and to divide them at that time simply by an arithmetical calculation of how long those retirement benefits were earned during marriage and how long they were earned outside the marriage. If the nonemployee spouse dies first, his or her share would go to his or her heirs or devisees.
This memorandum includes a staff draft implementing this approach (see
Exhibit 1), and raises a number of policy issues the Commission should
consider in determining whether this is a reasonable solution to the
problem.
SOME TERMINOLOGY
Although we use the terms "pension plan" and "retirement benefit"
loosely, the terms are somewhat misleading in their implication that all
pension plans and retirement benefits are sufficiently similar that they
can be lumped together and given similar treatment upon dissolution of
marriage. In fact, the Family Law Act provisions on joinder of pension
plans goes so far as to use the single term "employee pension benefit
plan." Civil Code § 4363.3. However, there are innumerable types and
variations of plans, benefits, funds, and accounts, with characteristics
so different that their only common feature is that they are all forms
of deferred compensation.
The deferred compensation feature is significant since it is the
basis for diviSion of employee pension benefit plans between the em
ployee spouse and the nonemployee spouse. Deferred compensation is
property or an interest in property acquired during marriage and there
fore is community property owned equally by the spouses and subject to
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division at dissolution of marriage. This is true regardless whether
the compensation is paid at dissolution of marriage or to be paid at a
later date.
The most useful distinction among various types of deferred compen
sation, for purposes of division, is between "defined contribution"
plans and "defined benefit" plans. This terminology is derived from the
Internal Revenue Code. Under a defined contribution plan, a separate
account is kept for each employee showing sums contributed by the
employee and by the employer on the employee's behalf. IRC § 414(c).
The present value of the employee's interest in a plan of this type is
therefore not difficult to determine in the ordinary case where the
employee's right to the funds in the account is absolute. Stock option
and profit sharing plans are often deferred compensation of the defined
contribution type.
Unlike a defined contribution plan, a "defined benefit" plan does
not involve a separate account detailing contributions by the employer
and employee. Labor for the employer over a specified period of time
qualifies the employee to receive plan benefits either in a fixed amount
or as a percentage of salary at retirement, or of average salary for a
period before retirement. IRC § 414(j). The present value of the
employee's interest in this type of plan cannot be determined with
preCision since it will depend on a number of unknown variables, such as
age at retirement, salary at retirement, etc. In the ordinary case,
extensive use of actuarial computations is necessary to determine the
present value of a plan of this type.
Among each of these two general types of plans there may be differ
ences as to vesting, maturity, options, and death benefits. An employee's
interest in a plan is "vested" if the employee has worked the required
length of time to qualify for benefits under the plan. Once an em
ployee's interest is vested, the employee is entitled to receive bene
fits under the plan upon maturity even though the employee may have
terminated employment before that time. It should be noted that even a
vested right to benefits under a plan may be subject to divestment under
some plans in unusual situations (~, the employee terminates employ
ment and sets up a competing business). Even though an employee's
interest in a plan is not yet vested, the nonemployee spouse has an
interest in the plan that is subject to division, either by discounting
the value of the plan for the possibility that it may never become
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vested or by reserving jurisdiction to see if it becomes vested. In ~
Marriage of Brown, 15 Cal.3d 838, 544 P.2d 561, 126 Cal. Rptr. 633
(1976) •
An employee's interest in a plan is "matured" when the employee has
satisfied all conditions precedent to receiving benefits under the plan
and would be entitled to actual payment upon retirement and making a
claim for payment. It is important to note that the employee's interest
may be matured even though the employee is relatively young and active,
with no intention to retire in the immediate future. This was the
situation in In ~ Marriage 2!. Gillmore, 29 Ca1.3d 418, 629 P.2d 1, 174
Cal. Rptr. 493 (1981), which held the employee spouse must pay the
nonemployee spouse his or her share on maturity, even though the employee
spouse does not choose to retire and is not receiving payments.
Payments under a matured plan are actuarily adjusted based on the
age of the employee at retirement; a younger employee receives a lower
payment, an older employee receives a higher payment, based on the
actuarial assumption that the length of time the payments are made will
vary accordingly, with the result that the total amounts paid out are
equalized. In addition, employee pension benefit plans also ordinarily
offer a number of different payment "options," likewise actuarily equal
ized, that may best suit the employee. The choice of options, in addi
tion to the timing of retirement, has generated litigation, since the
option choice most advantageous to the employee spouse may not be the
most advantageous to the nonemployee spouse, depending upon his or her
age, health, financial circumstances, etc. The courts have held that
the employee spouse, by exerciSing a choice of options, cannot defeat or
reduce the interest of the nonemployee spouse. See,~, In ~ Marriage
of Stenquist, 21 Cal.3d 779, 582 P.2d 96, 148 Cal. Rptr. 9 (1978).
Among the more difficult problems that have arisen so far with
respect to options that defeat the nonemployee spouse's interest involve
election of a "joint and survivor annuity." This is a provision that,
upon the death of the employee spouse, an annuity of one-half the em
ployee's retirement benefits will be paid to the surviving spouse; the
amount of the employee spouse's benefits are actuarily reduced to cover
the cost of continued payments to the surviving spouse for life. This
option must be offered by all employee pension benefit plans under ERISA
and is a popular option with the employee spouse. However, it is an
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unpopular option with the ex-spouse in cases where the employee spouse
has remarried, since it reduces the benefits to which the ex-spouse is
entitled. The ex-spouse was able to preclude the pension plan from
honoring a joint and survivor annuity election by the employee spouse in
In ~Marriage of Lionberger, 97 Cal. App.3d 56, 158 Cal. Rptr. 535
(1979).
Employee pension benefit plans also vary in their treatment of
benefits upon the death of the employee spouse. Many defined contri
bution plans payout the accumulated funds in the employee's account at
the employee's death. Defined benefit plans, on the other hand, fre
quently terminate benefits upon the employee's death or payout a small
death benefit to the surviving spouse. Under existing California law,
the interest of the nonemployee spouse in pension benefits terminates on
the death of the employee spouse. Benson v. City of Los Angeles, 60
Cal.2d 355, 384 P.2d 649, 33 Cal. Rptr. 257 (1963).
TWO APPROACHES TO DIVISION
The foregoing discussion of employee pension benefit plans begins
to illustrate the difficulties and complexities facing the courts in
making an appropriate division at dissolution of marriage. Under exist
ing law, the choices available are variations on two themes: a present
disposition approach and a reservation of jurisdiction approach. In the
present disposition approach, the parties accept a current valuation of
their retirement benefits. These benefits are awarded to the spouse
employee covered by the benefits, and the other spouse is awarded other
community assets of equivalent value. In the reservation of jurisdiction
approach, the parties agree (or the court compels them) to wait until
retirement, at which time the parties or the court decide how the retire
ment benefits are to be divided.
These two methods of handling retirement assets are recognized in
the case law and have been given judicial approval. In re Marriage of
Brown, supra. A trial court has broad discretion to select either
method. It is so broad, in fact, that there are no reported appellate
cases reversing the method of disposition made by the trial court.
By allowing the trial judge broad discretion, the appellate courts
have provided little guidance as to when one method may be more appro
priate than the other. In Phillipson~ Board of Administration, 3
Cal.3d 32, 89 Cal. Rptr. 61 (1970), the present disposition was declared
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the preferred method, but later cases such as Marriage of Skaden, 19
Cal.3d 679, 139 Cal. Rptr. 566 (1977), appear to negate any preference.
As a result, some judges favor the present disposition system while
others favor reserving jurisdiction.
Advantages and Disadvantages of Present Disposition
Under the present disposition appraach, the current value of the
employee pension benefit plan is determined by actuarial computation,
the portion attributable to the community is ascertained, and that
portion is awarded to the employee spouse with offsetting property of
equal value awarded to the nonemployee spouse. Each of these steps
deserves some elaboration.
In order to determine the current value of the employee pension
benefit plan, the appraiser must first distinguish between defined
contribution and defined benefit plans. In the case of a defined con
tribution plan, the current value of the plan is known, but the value
may have to be actuarily adjusted for the possibility that the benefits
may not become vested or may not mature. Since, often, defined contri
bution plans are vested and are payable at death if the employee dies
before the benefits mature, there may be little difficulty ascertaining
the value of the benefits with precision.
In the case of a defined benefit plan, all that is known is the
value of the benefits to be paid upon maturity if the employee works
sufficiently long that the benefits become vested and if the employee
survives to maturity. The appraiser must estimate the employee's salary
at retirement, age and length of service at retirement, and other vari
ables that affect the benefits. The appraiser must then use mortality
tables and turnover tables to compute the actuarial probability that the
benefits will be paid and must discount the estimated amount of benefits
by this probability. For example, if an estimated $100,000 benefits are
payable to the employee at age 65 and if mortality tables show, at the
time of calculation, that the employee has a 90% chance of reaching age
65, the $100,000 must be reduced to $90,000 for purposes of computing
current value. After discounting the amount of the benefits for con
tingencies, the appraiser must further discount the amount of the bene
fits to their present value, assuming a reasonable rate of return on the
investment. For a detailed description of the valuation process, see
Projector, Valuation~ Retirement Benefits in Marriage Dissolutions, 50
L.A. Bar Bull. 229 (1975).
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Several features about this process are immediately apparent.
First, the problem of deriving a current value for employee pension plan
benefits requires use of valuation experts and is necessarily specula
tive. This generates expense and litigation. Second, the actuarial
valuation process necessarily yields an incorrect valuation in every
case. In the example above (10% reduction in value due to a 90% morta
lity/survival factor) .. if the employee actually survives to age 65, the
employee's interest will have been undervalued by 10%; if the employee
fails to survive to age 65, the employee's interest will have been
overvalued by 90%. It is true, in the aggregate, that the value of all
employees' interests must be reduced by 10% to yield an actuarily correct
result. But in the individual case this process results in inequity to
either the employee spouse or the nonemployee spouse due to overvaluation
or undervaluation each time.
Once the current value of the benefits is determined, the portion
of the benefits attributable to community property (i.e., the portion
earned during marriage) must be determined. Again, in the case of a
defined contribution plan, the actual contributions of the employee and
employer during marriage are known. In the case of a defined benefit
plan, however, there may be no contribution allocable to the employer or
employee, and the total time employed while married and while not mar
ried probably is not yet known. Once again, the appraiser will have to
make some estimates for purposes of allocating the community portion of
the retirement benefits.
After determination of the community interest in the retirement
benefits, that interest can be assigned to the employee spouse and other
community property of equal value can be assigned to the non-employee
spouse. This assumes, of course, that there is other community property
of equal value. Many times the employee pension benefit plan is the
most significant asset of the community. In other cases there may be a
family home that can be exchanged for the retirement plan. However, if
there are not sufficient community assets to pay for the retirement
plan, the employee may have to give a promissory note to the nonemployee
spouse and pay for the plan on an installment basis.
The exchange of the retirement plan for other community property is
"clean"--i t makes the plan the employee's own, without further compli
cations of having the nonemployee spouse involved at the time of retire
ment, selection of options, etc. It avoids having to involve the court
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again at a later time, Which could happen if the court reserves juris
diction over the property. It avoids involvement of the pension fund in
the litigation and leaves the fund respcnsible only to one person--the
employee spouse.
However, the present disposition method also has substantial
drawbacks. The employee spouse may be impoverished by the loss of all
community assets in exchange for a future interest in retirement bene
fits that the employee may never realize, either through failure of
vesting or of maturity. Many persons believe that they are being forced
to give up real assets for future speculative value; "This view is
strongly held, and not without reason." Hardie, Pay Now ~ Later:
Alternatives in the Disposition ~ Retirement Benefits ~ Divorce, 53
Cal. St. Bar J. 106, 110 (1978). There are also tax disadvantages for
the employee spcuse, who receives retirement benefits that are taxable
as ordinary income While the nonemployee spcuse receives an asset taxable
at capital gains rates.
It has also been argued that the present disposition method is
basically unfair to the nonemployee spcuse due to "an inherently con-
s erva tive valuation process." Professor Bruch states that, "Because of
the pressure to amass assets at divorce to offset the inflated equity in
the family home, many women have traded important interests in their
spouses' pensions for the ability to stay in the home. In most
cases, both spcuses would be better served in the long run with an
approach that preserves old-age security for each, and separates this
issue from a search for current liquidity. Those who have taken
unduly small returns on community property pension rights, the inevi
table result of an inherently conservative valuation process, may well
regret this step as they approach old age, and the taxpaying public will
share in the costs of their unfortunate choice." Bruch, The Definition
and Division of Marital Property in California: Towards Parity and
Simplicity, 33 Hastings L.J. 769,851-53 (1982) (footnote omitted).
In summary, then, the present dispcsition method offers the possi
bility of a clean break between the parties without ensuing complica
tions; the matter is settled once and for all at dissolution of marriage.
However, this is achieved at the price of complex, speculative, and
necessarily incorrect valuations, extensive litigation, adverse tax
consequences, and a basic unfairness perceived by both the employee
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spouse and the nonemployee spouse. For these reasons, there are many
strong advocates of a reservation of jurisdiction procedure for dealing
with employee pension benefit plans.
Advantages and Disadvantages of Reserved Jurisdiction
The speculation inherent in deriving current value of retirement
benefits, and the risk that the employee spouse will have to pay the
nonemployee spouse for benefits that the employee spouse never receives,
can be avoided by not dividing the retirement benefits at dissolution
but by the court reserving jurisdiction to divide the benefits when
received. Under the reservation of jurisdiction approach, the actual
amount of retirement benefits to be received is known, and the court can
order the share of the nonemployee spouse turned over as the benefits
are paid. The exact share of the nonemployee spouse will also be known
at this time, based either on actual contributions made during marriage
or on proportion of time of employment during marriage.
Both of the Commission's family law consultants favor the reser
vation of jurisdiction approach as a general rule for dividing retire
ment benefits. Professor Reppy states, "The pro rata formula is the far
more desirable remedy in that it avoids the difficulties of present
valuation and allows the spouses to share both in sums subsequently paid
under the pension plan and in the risk of termination." Reppy, Commu
nity and Separate Interests in Pensions and Social Security Benefits
After Marriage of Brown and ERISA, 25 UCLA L. Rev. 417, 428 (1978). See
also Bruch, The Definition and Division of Marital Property in Cali
fornia: Towards Parity and Simplicity, 33 Hastings L.J. 769,852 (1982).
Judge Harvey, whose letter to the Commission was attached to Memorandum
83-83, states: "But, it would be far fairer to both parties, would
obviate the need to employ expert actuaries in every case, and permit
the equal division of the community property in every case if this court
were authorized to divide the community property retirement benefits
when they contractually become payable and to divide them at that time
simply by an arithmetical calculation of how long those retirement
benefits were earned during marriage and how long there were earned
outside the marriage."
While reservation of jurisdiction cures the main defects of the
present division approach, reservation of jurisdiction has its own
problems, which cannot be ignored. First is simply the mechanics of
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reserving jurisdiction. It requires further burden on the court to
reopen proceedings at a later time, as well as on the parties and their
attorneys. It requires the nonemployee spouse to keep track of the
status of the employee spouse--whether he or she has moved, changed
jobs, decided to retire, etc.
These problems could be mitigated somewhat by making a present
court order for payment of future benefits on the basis of a formula set
out in the order, but Whether such an order would be honored in most
cases is problematical: "Few companies have developed sophisticated
data base systems for pension plans, and even fewer have the capability
to store and retrieve information about the marital status of employees
and prior claims against an employee's pension benefit. In some cases,
joinders to the plan may never be seen by the administrator. If they
are, and some type of settlement is made to dispose of the pension
issue, the administrator is seldom informed. It is naive to assume that
several years later the plan administrator will have any information
regarding the divorce, let alone information regarding the final dispo
sition of the pension. Administrators change, offices move, files go
into storage or are lost, the spouse may have moved leaving no forward
ing address or changed her name through remarriage. In many cases,
deferred vested benefits are awaiting application but the participant
can no longer be located." Hardie and Sutcliffe, Reserving Jurisdic
tion: ! Potential Trap, California Lawyer 33, 35 (July/August 1982).
These practical problems have caused some pension plan experts to
conclude that reservation of jurisdiction has only a limited usefulness
and is feasible mainly when the dissolution occurs near the time of
retirement. Of course, this is also the time When the present disposi
tion technique is also most accurate and involves least risk to the
parties.
In addition to the practical problems in reserving jurisdiction,
there are problems in enforcing the court order dividing the retirement
benefits as paid. If the payments are made to the employee spouse,
there is no assurance that he or she will voluntarily pay over the share
of the nonemployee spouse. We have sufficient experience with enforce
ment of support obligations to know this is a real problem. This prob
lem can be mitigated by joining the pension plan as a party to the
litigation and requiring issuance of separate checks to the employee and
nonemployee spouses. Civil Code Sections 4363.1-4363.3 were enacted in
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1977 to provide a procedure for joining a pension plan and making a
court order for disposition of the retirement benefits binding upon the
plan. So far as we know, this scheme is working satisfactorily in those
cases where joinder is possible.
Reservation of jurisdiction defers receipt of the nonemployee
spouse's interest in the employee pension benefit plan until the bene
fits are paid. During this period a number of contingencies may occur
that are undesirable from the perspective of the nonemployee spouse. If
the employee dies, many pension plans provide no benefits. The right of
the nonemployee spouse, then, is dependent upon the health, accident
proneness, and other happenstances of the employee spouse. From the
perspective of the employee spouse, however, this is only proper--a
contingent right of the employee spouse should not be converted into a
present benefit of the nonemployee spouse at the expense and risk of the
employee spouse. The nonemployee spouse should be entitled to share
only what the employee spouse has--the right to receive benefits when
paid if all contingencies are satisfied.
This reasoning also applies to another situation. Many times
pension funds are poorly managed and produce a low return on investment;
this may be especially true of defined contribution plans. Sometimes
the plans become insolvent or the plan manager absconds. These risks
probably should be borne equally by the spouses. Under ERISA there is a
Pension Benefit Guaranty Corporation to cover benefits up to a certain
level if the pension plan terminates. It is not clear that the PBGC
benefits are covered in a reservation of jurisdiction. Certainly, if
the Commission adopts a reservation of jurisdiction scheme, this matter
should be addressed.
Suppose during the interim period the nonemployee spouse dies? Of
course, it can be argued that then the nonemployee spouse isn't hurt,
since the retirement fund is intended to support the parties during
retirement and the nonemployee spouse no longer needs support, being
dead. This is in fact the reasoning of Waite.!.!. Waite, 6 Cal.3d 461,
492 P.2d 13, 99 Cal. Rptr. 325 (1972), and has come to be known as the
"terminable interest" rule. The commentators, including the Commis
sion's family law consultants, strongly disagree with the terminable
interest rule. Apart from present disposition, the only apparent remedy
for the terminable interest rule is to make the nonemployee spouse's
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interest in retirement benefits devisable and descendable. This would
require either that the decedent's estate be kept open to receive bene
fits when paid, or that as part of the court's decree the future bene
fits are distributed to creditors, heirs, and devisees in some manner
that will be workable. Whether the pension plan or the employee spouse
should be joined in such a proceeding is problematical.
Assuming the court reserves jurisdiction and the employee spouse,
nonemployee spouse, and pension plan all survive the vicissitudes of
life until the time the benefits mature, the question then arises of
when the nonemployee spouse is entitled to payment. In.!!. Marriage of
Gillmore, 29 Cal.3d 418, 629 P.2d I, 174 Cal. Rptr. 493 (1981), involved
reservation of jurisdiction where the employee spouse became eligible to
retire in his early 50's but intended to continue working for some time
to come; the nonemployee spouse sought payment of her share immediately
upon maturity of the employee spouse's interest. The court held that
the nonemployee spouse was entitled to be paid, since the benefits were
both vested and matured. The employee spouse "will not forfeit his
benefits if he leaves his employment voluntarily, is terminated or
retires. The only condition precedent to payment of the benefits is his
retirement, a condition totally within his control. A unilateral choice
to postpose retirement cannot be manipulated so as to impair a spouse's
interest in those retirement benefits." 29 Cal.3d at 423. In other
words, reservation of jurisdiction under existing law can be made only
until the time of maturity; thereafter there must be a division of the
asset. To the employee spouse's objection that he was being forced to
retire, the court disingenuously replied that he is free to continue
working; he simply must either pay for the nonemployee spouse's share of
the benefits at their present value, or pay her a share on an installment
basis. In essence, the court reserves jurisdiction until the benefits
mature, then applies the present disposition method, which should be
easier to apply because many of the contingencies that make valuation a
problem have been removed. However, not all the contingencies have been
removed, so all the problems of the present disposition method are still
present. As Judge Harvey has written to the Commission, "If the husband
pays his wife for her share of the retirement benefits, and then dies
before retiring, it is obvious that only the wife may be compensated for
much of the retirement benefits. By converting a conditional right-
conditional on retirement, which was in the control of the employee-
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spouse--into an unconditional, presently payable right, the Supreme
Court has managed to conceive of a scheme where, in many cases, only the
nonemployee-spouse will be fully compensated for the value of the retire
ment benefits. Simultaneously, the Supreme Court has converted payments
intended for subsistence during nonproductive years into an immediately
payable sum during the parties' productive years so far as the nonemployee
spouse is concerned."
Legislation could provide that where the court reserves jurisdic
tion, the retirement benefits are not to be paid to the nonemployee
spouse until actually paid out by the pension fund. This would further
simplify the computation problem and eliminate any burden on the em
ployee spouse. However, is it fair to the nonemployee spouse for the
employee spouse to have full control over the timing of retirement
benefits? The Supreme Court says no, pointing out that both the timing
of receipt and the control of an asset are important aspects of its
value; postponement of benefits late in life may completely defeat the
nonemployee spouse's interest; the employee spouse's decision to wait to
receive the pension until it will be most profitable and convenient to
him deprives the nonemployee spouse of her rights; her financial situa
tion may involve factors significantly different from his; and support
is not an adequate interim remedy for the nonemployee spouse, who should
not be dependent on the discretion of the court to provide her the
equivalent of what should be hers as a matter of absolute right. Others
would say it is fair to make the nonemployee spouse wait: if the
parties remain married, all the nonemployee spouse could expect to
receive until actual retirement would be support as a spouse; a retire
ment sllowance would not be received until the employee spouse actually
decided to, and did, retire; for retirement is intended to, and does,
simply provide support during the years following active employment.
This discussion illustrates one other serious problem with the
reservation of jurisdiction approach to the division of retirement
benefits--the amount of the nonemployee spouse's share remains within
the control of the employee spouse, who by exercising various options
can generate results to his or her own advantage and to the disadvantage
of the nonemployee spouse. The courts have had to artificially manipulate
the system to assure that the nonemployee spouse is not improperly
denied any rights. In ~ Marriage £!. Stenquist, 21 Ca1.3d 799, 582 P.2d
96, 148 Cal. Rptr. 9 (1978), for example involved exercise of an option
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by the employee spouse to take "disability pay" at 75% of basic pay
rather than "retirement pay" at 65% of basic pay, for obvious reasons.
But disability pay is separate property, not subject to division, whereas
retirement pay is community property, subject to division. The court
held that one spouse cannot, by involving a condition wholly within his
control, defeat the community interest of the other spouse. Of the
disability pay, only the portion above the amount that would be retire
ment pay is separate; the remainder is presumed to be community property
subject to division.
Similarly, the joint and survivor annuity option mandated by ERISA
can substantially lower the employee spouse's benefits (and in turn the
benefits of the nonemployee spouse) in favor of the employee spouse's
new spouse who survives. The courts have had to intervene here also to
preclude the employee spouse from electing the joint and survivor
annuity option. In ~ Marriage of Lionberger, 97 Cal. App.3d 56, 158
Cal. Rptr. 535 (1979).
One approach to solving the joint and survivor annuity problem is
to reexamine another facet of the "terminable interest" rule--that the
interest of the nonemployee spouse is limited to retirement benefits
payable to the employee spouse, and does not extend to death benefits
payable to the employee spouses's beneficiaries or other third parties.
In Benson ~ City of Los Angeles, 60 Cal. 2d 355, 384 P. 2d 649, 33 Cal.
Rptr. 257 (1963), the employee spouse earned pension rights during the
first marriage but after retirement had remarried and was still remar
ried at the time of death. Both the first and second spouse sought a
widow's pension payable by the retirement system, earned during the
first marriage. The court ruled that under the terms of the pension
contrac t the first wife was not a "widow" and the second wife was, and
thus the second wife, not the first, was entitled to the widow's pension
even though earned during the first marriage. This ruling has been
roundly criticized, and it has been suggested that the law should make
clear that the share of the nonemployee spouse in the retirement bene
fits payable to the employee spouse should extend to death benefits
payable to third parties under the employee benefit pension plan. Such
an approach wonld be theoretically sound where the death benefits were
earned during marriage and thus may properly be considered community
property subject to division. This change in the law perhaps should be
incorporated in legislation implementing a reservation of jurisdiction
scheme, if the scheme is to make sense and operate fairly.
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To summarize, the reservation of jurisdiction approach to division
of employee pension benefit plans avoids some of the worst features of
present disposition--speculative valuation testimony, unequal sharing of
risks, adverse tax consequences. However, there are many problems
associated with the reservation of jurisdiction, including practical
problems for the nonemployee spouse in obtaining payment in the future,
vicissitudes during the interim that could defeat the interest of the
nonemployee spouse, and problems concerning the timing and choice of
options by which the employee spouse could take unfair advantage over
the nonemployee spouse. It appears that these problems could be re
dressed to some extent by legislation, but many of them seem endemic to
the basic system of reservation of jurisdiction.
STAFF PROPOSAL
As with all the problems the Commission attacks, there are no easy
solutions for division of employee benefit pension plans; if there were,
the problem would already have been solved and the Commission would not
be working on it. Mindful of the advantages and disadvantages of both
the present disposition and the reserved jurisdiction approaches, the
staff concludes that on balance the reserved jurisdiction approach is
basically simpler and fairer to the parties, and should be preferred.
This is consistent with the recommendation of the Commission's consul
tants and with the Commission's basic feeling at the November 1983
meeting after reviewing Judge Harvey's observations.
The staff has prepared the draft attached as Exhibit 1 that
attempts to resolve as well as possible the policy considerations in
volved in the reservation of jurisdiction approach. We note these
matters here so that you will be alerted to them as you review the
draft.
Civil Code § 4363.3 (repealed). "Employee pension benefit plan" defined
The definition of "employee pension benefit plan" currently is
found among the procedural provisions for joinder of plans in dissolu
tion proceedings. The term is a little awkward, but because it is
already established and used in the Family Law Act we have preserved it
in this draft, but have moved it to Section 5110.450 where it will be
among the other provisions governing characterization of marital prop
erty.
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Civil Code § 4800.4 (added). Division of employee pension benefit plan
Subdivision (a). The staff draft adopts a variation of the reserva
tion of jurisdiction approach to dividing employee pension benefit plans
at dissolution of marriage. The basic reservation of jurisdiction
approach appears sound in that it removes from the employee spouse the
risk of giving up other community assets in exchange for an asset that
may never be realized due to circumstances within or beyond the control
of the employee spouse; and of course, it makes the valuation process
more certain and less speculative.
Under the variation proposed by the staff, the court would not
actually reserve jurisdiction but would make an immediate division at
dissolution by establishing a formula to be applied when payments are
made. The court order would bind the pension plan if joined as a party,
and if not, would be enforceable against the employee spouse. The
virtues of this scheme are that it will be unnecessary for the parties
to rehire attorneys and reopen proceedings at some time in the future.
It also makes it easier for the nonemployee spouse to obtain his or her
share of the benefits without having to somehow monitor the pension plan
to find out When payments are being made.
The staff draft does not distinguish between defined contribution
and defined benefit plans in this respect. Even a defined contribution
plan may be subject to termination, bankruptcy, etc. The general rule
is that both spouses share all risks and all benefits.
Nor does the staff draft distinguish between matured and unmatured,
and vested and unvested, plans. In this regard it overrules In ~
Marriage of Gillmore on policy grounds--even though the employee spouse
has the right to receive benefits, the employee spouse should not be
forced to retire as a practical matter or be impoverished. The parties
should share the benefits as received.
This approach leaves open the possibility that the employee spouse
will purposefully delay taking retirement benefits in order to harm the
nonemployee spouse. Or, more innocently, that the employee spouse
simply has no need for the benefits at present and has more to gain by
waiting, even though the nonemployee spouse is in desperate need of his
or her share.
Support, of course, is the remedy designed to cure this situation;
however, support is often inadequate. And, as the Supreme Court has
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reiterated, the nonemployee spouse should not be dependent on the discre
tion of the court to provide the equivalent of what should belong to the
spouse as a matter of right. Another possibility, suggested by Professor
Bruch, is to have the pension plan set up separate accounts for the
spouses, so that each can control his or her own share. Although this
solution is very attractive, the staff believes that as a political
matter it would be futile to try to impose such a scheme on the pension
plans. The only practical solution the staff can see is to give the
court discretion, in an appropriate case, to order a division of the
benefits before payment is actually made. This, of course, detracts
from the basic purpose of the recommendation. It should also be recog
nized that the nonemployee's share of benefits before actual retirement
is not likely to be more adequate than support, and requiring the employee
spouse to make those payments rather than support means that the payments
will not be deductible for income tax purposes by the employee spouse.
What is the Commission's preference?
Subdivision (b). One branch of the terminable interest rule, that
the nonemployee spouse loses his or her interest upon his or her own
death (Waite ~ Waite), is overruled by subdivision (b), which makes the
interest of the nonemployee spouse subject to testamentary disposition.
The staff believes this may cause practical problems, however.
Suppose the nonemployee spouse dies before benefits are paid out, leav
ing two surviving children and a predeceased child who in turn had two
surviving children. If the nonemployee spouse dies intestate, the
interest will be owned 1/3, 1/3, 1/6, 1/6. Is the employee pension
benefit plan supposed to make individual payments to these persons, or
can it simply pay to the estate? If so, must the estate remain open?
Can the pension plan be required to pay unless it has been joined as a
party in the probate proceeding? Suppose there is no probate proceed
ing; must the survivors obtain a declaration of heirship; if so, are
existing procedures adequate? Similar questions can be asked for devi
sees, particularly residuary devisees, if the nonemployee spouse dies
testate. The staff does not know the answers to these questions-
perhaps our probate experts can advise us. We simply note our concern,
and would add that there seems to be some logic in the Waite ~ Waite
concept that, "The state's concern, then, lies in provision for the
subsistence of the employee and his spouse, not in the extension of
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benefits to such persons or organizations the spouse may select as
objects of her bounty. Once the spouse dies, of course, her need for
subsistence ends, and the state's interest in her sustenance reaches a
coincident completion. When this termination occurs, the state's
concern narrows to the sustenance of the retired employee; its pension
payments must necessarily be directed to that sole objective." 6 Ca1.3d
at 473.
Civil Code § 5106 (amended). Payment pursuant to employee benefit plan
Civil Code Section 5106 contains protections for a pension plan
that makes payments to the employee according to the terms of the plan
unless the plan has received notice that another person claims an inter
est in the payments. The staff draft makes technical amendments in this
section to conform to the terminology of defined "employee pension
benefit plans."
Civil Code § 5110.450 (added). Employee pension benefit plans
Subdivision (a). The definition of "employee pension benefit plan"
is taken from Section 4363.3, with a couple of minor additions taken
from Section 5106. The critical feature of the definition is that the
draft excludes self-employed retirement plans and individual retirement
accounts. The reason for this exclusion is that these types of retire
ment plans are really more like savings accounts for retirement pur
poses, and are within the control of the spouses, not the control of a
third person. For this reason, the staff believes they should be treated
like any other community property at dissolution of marriage, and not
wait until withdrawals or payments are made. At dissolution the court
would have discretion to award the whole account to one party, to divide
the account immediately, or to reserve jurisdiction for a later divi
sion, depending on such matters as tax and interest penalties and other
factors.
Subdivision (b). Subdivision (b) adopts the "time rule" as the
measure of the community's interest in an employee pension benefit
plan--the proportion of time employed during marriage out of total time
employed. This rule applies to both defined benefit plans and defined
contribution plans, even though the exact amounts contributed under a
defined contribution plan can be determined. The reasons for this
choice are that it is simpler to have a single rule applicable to all
pension benefit plans (particularly since some plans are hybrids are not
-17-
easily classified as defined benefit or defined contribution) and that
it is fairer in that it averages out changes in contributions due to
inflation and salary increases due to advancement over the course of
employment, and does not attribute to the community either too Iowan
interest (because the marriage occurred early) or too high an interest
(because the marriage occurred late). The Executive Committee of the
Los Angeles County Bar Association Probate and Trust Law Section has
wri tten to us that, "In general, with regard to bo th defined contribu
tion and defined benefit plans, proration on the basis of time produces
a fair result. Now might be an appropriate time to codify that scheme
so as to promote uniformity in application." (10/31/83).
Subdivision (b) also overrules the branch of the terminable inter
est rule that holds that the nonemployee spouse is not entitled to
benefits paid out after the death of the employee spouse (Benson v.
Ci ty of Los Angeles). Subdivision (b) gives the comll.mity an interest
in all benefits paid on account of the employee spouse, including death
benefits. The Commission should decide whether this is a desirable
change in the law.
Transitional Provision
Because of the confusion caused in attempting to apply new rules to
pending proceedings, the staff draft provides that the new rules do not
apply to dissolution proceedings commenced before the operative date,
even though jurisdiction may have been reserved. Our feeling is that
the parties may well have worked out their property settlement on the
basis of the old law, and that should continue to govern.
Likewise, the new rules would not apply in the case of a married
person who dies before the operative date. Wills may have been made,
and options selected, on the basis of the old law, and peoples' reason
able reliance should not be disturbed.
After the Commission has made the necessary policy decisions on
this matter, the staff will prepare a complete tentative recommendation
draft in anticipation of its distribution to our family law and probate
law mailing lists for comment.
Respectfully submitted,
Nathaniel Sterling Assistant Executive Secretary
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Memorandum 84-9 Study F-663
EXHIBIT I
Staff Draft
PROPOSED LEGISLATION
An act to amend Section 510~ of, to add Sections 4800.4 and 5110.450
to, and to repeal Section 4363.3 of, the Civil Code, relating to employee
pension henefit plans.
The people of the State of California do enact as follows:
404/135
Civil Code § 4363.3 (repealed). "Employee pension benefit plan" defined
SECTION 1. Section 4363.3 of the Civil Code is repealed.
I;~~ .. ~,.. Att ""eft ..t" -til ..... t!&P"'T -tile -teft! !I ..... I'~e 1"'ft'"'&" ioe"e~"''''
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tI",,,,,1t -lomtltlt. -tftp;i,~ 8"" tI!h!"'~!tP 'I'~_" M .. ~PPeft """'I'"""aM&tt. .me",}",p
&~ -t fte .. eHtt.... "&MP ... l>!tH.... tiP "eHtteft l>e~U -t,.1"'T
Comment. Former Section 4363.3 is continued in subdivision (a) of Section 5110.450 (employee pension henefit plans).
404/087
Civil Code § 4800.4 (added). Division of employee pension henefit plan
Section 4800.4 is added to the Civil Code, to read: SEC. 2.
4800.4. (a) Except upon the written agreement of the parties, or
on oral stipulation of the parties in open court, in a division of an
employee pension benefit plan of a party upon dissolution of marriage or
legal separation, the court shall order that the interest of the commu
nity in the plan be divided equally between the parties as payments or
refunds are actually made pursuant to the plan.
(b) The interest of the nonemployee spouse in an employee pension
benefit plan of a party is subject to testamentary and nontestamentary
disposition, and absent such disposition passes by intestate succession,
in the same manner and to the same extent as other property of the
nonemployee spouse.
Comment. Subdivision (a) of Section 4800.4 states the general rule that the court must make an immediate division of the community interest in an employee pension henefit plan by ordering payments under the plan
-1-
§ 5106
divided when paid. The general rule is subject to a contrary agreement of the parties, for example to value the community interest in the plan as of the time of dissolution and award the interest to the employee spouse with offsetting community property of equal value to the nonemployee spouse, or to reserve jurisdiction to divide the property when payments under the plan are made.
Immediate division of the community by ordering future payments divided when made can be facilitated by joinder of the employee pension benefit plan pursuant to Sections 4363.1 and 4363.2. The order is also enforceable against the employee spouse pursuant to Section 4351.
Subdivision (a) overrules In ~ Marriage 2!. Gillmore, 29 Ca1.3d 418, 629 P.2d I, 174 Cal. Rptr. 493 (1981), which held that the interest of the community in an employee pension benefit plan must be divided when the employee spouse's interest in the plan is vested and matured, whether or not payments pursuant to the plan are actually being made. Under this section the community does not receive its interest in the plan until payments are actually made. The interest of the community in an employee pension benefit plan is defined in Section 5110.450.
Subdivision (b) overrules Waite v. Waite, 6 Cal.3d 461, 492 P.2d 13, 99 Cal. Rptr. 325 (1972), and casE;i following it which held that the interest of the nonemployee spouse in an employee pension benefit plan terminates upon the death of the nonemployee spouse. Subdivision (b) makes clear that the nonemployee spouse may dispose of his or her share of the community retirement benefits by will or by nontestamentary disposition such as a beneficiary or pay on death designation. The heirs or devisees of the nonemployee spouse may protect their interests by service of an appropriate notice or order in probate on the employee pension benefit plan. See Section 5106 (payments pursuant to employee benefit plan).
404/083
Civil Code § 5106 (amended). Payments pursuant to employee benefit plan
SEC. 3. Section 5106 of the Civil Code is amended to read:
5106. -flt~ Notwithstanding -the 1'P_~!t!l:e_ e~ Se~~_ §I,~ aM
;H§, wltefteyel' any other prOVision of this title:
(a) Whenever payment or refund is made to a participant or ~!l:8
the participant's beneficiary or estate pursuant to a written employee
benefit plan governed by the Employee Retirement Income Security Act of
1974 (P.L. 93-406), as amended, ~eft the payment or refund shall fully
discharge the employer and any administrator, fiduciary or insurance
company making ~ft the payment or refund from all adverse claims thereto
unless, before ~ft the payment or refund is made, the administrator of
8~ft the plan has received at its prinCipal place of business within
this state, written notice by or on behalf of some other person that
8~ft the other person claims to be entitled to ~~ft the payment or
refund or ~&me part thereof. Nothing e_~e~ in this ~ee~!tft ~heff
-2-
§ 5110.450
e~~e~ subdivision affects any claim or right to any such payment or
refund or part thereof as between all persons other than the employer
and the fiduciary or insurance company making ~eft the payment or refund.
The terms "participant", "beneficiary", "employee benefit plan", "em
ployer", "fidiciary" and "administrator" .. heH, have the same meaning as
provided in Section 3 of the Employee Retirement Income Security Act of
1974 (P.L. 93-406), as amended.
(b) N_t:eft .. ~_~t:~ 'the f'l'e¥'i:flt:"ftfI e~ SeeM:e_ H~ eM ~~l!~.
wlt_"",ei!' Whenever payment or refund is made to an employee, former
employee or .. t:e the beneficiary or estate .££ the employee £E. former
employee pursuant to a written ~e~t:rem_~. eeatft er e~her ~~~yee
~efte~t:~ f'~"ft er .. ftY~ .. f'~ftft employee pension benefit plan, other than a
plan governed by the Employee Retirement Income Security Act of 1974
(P.L. 93-406), as amended, e~elt the payment or refund shall fully dis
charge the employer and any trustee or insurance company making ~It
the payment or refund from all adverse claims thereto unless, before
e~eft the payment or refund is made, the employer or former employer has
received at its principal place of business within this state, written
notice by or on behalf of some other person that ~It the other person
claims to be entitled to ~It the payment or refund or .. eme part thereof.
Nothing ~"ft~e~ in this eee~t:eft .. he~~ .. ~~e~ subdivision affects any
claim or right to any such payment or refund or part thereof as between
all persons other than the employer and the trustee or insurance company
making .. ~elt the payment or refund.
Comment. The amendments to Section 5106 are technical. The term "employee pension benefit plan" is defined in Section 5110.450.
404/082
Civil Code § 5110.450 (added)
SEC. 4. Article 4 (commencing with Section 5110.450) is added to
Chapter 2 of Title 9 of Part 5 of Division 4 of the Civil Code, to read:
Article 4. Combined Community and Separate Property
§ 5110.450. Employee pension benefit plans
5110.450. (a) As used in this part, the term "employee pension
benefit plan":
(1) Includes a public or private retirement, pension, death, profit
sharing, stock bonus, thrift, savings, or similar plan of deferred
-3-
§ 5110.450
compensation, whether of the defined contribution or defined benefit
type.
(2) Does not include a self-employed retirement plan or an indivi
dual retirement annuity or account.
(b) The interest of the community in an employee pension benefit plan of a
married person is a proportionate amount of the payments or refunds made
under the plan on account of the person. The proportionate interest of
the community is the fraction of the time during marriage of the person's
employment attributable to the plan out of the total time of the person's
employment attributable to the plan. Payments and refunds made under an
employee pension benefit plan include amounts paid by the Pension Benefit
Guaranty Corporation or by a surety or otherwise as insurance, guaran-
tee, or other security for the plan.
Comment. Subdivision (a) of Section 5110.450 defines the term "employee pension benefit plan" not only for the purpose of this section but for other places where the term is used in the Family Law Act. See, ~, Sections 4351 (enforceability of judgment and orders), 4363 (joinder procedure), 4800.4 (division of employee pension benefit plan), 5106 (payments pursuant to employee benefit plan).
Paragraph (1) of subdivision (a) continues former Section 4363.3 ("employee pension benefit plan" defined), with the additon of references to death benefits and savings plans, formerly found in Section 5106 (payments pursuant to employee benefit plan).
Paragraph (2) of subdivision (a) is new. It is intended to exclude accounts created and controlled by the parties on their own behalf, such as Keogh Act plans and IRAs. The effect of this exclusion is that such plans and accounts are subject to division at dissolution in the same manner as other community and quasi-community property, although the parties may agree to divide such plans and accounts in the same manner as employee pension benefit plans. Compare Section 4800(a) (division of community and quasi-community property) with Section 4800.4 (division of employee pension benefit plan). ----
Subdivision (b) defines the community's share of retirement benefits. The definition applies for all purposes, including rights at death, and is not limited to division at dissolution of marriage.
Under the "time rule" adopted by subdivision (b), if a married person's employment that gives rise to the benefits occurs entirely during the marriage, all the benefits are community property. If the employment that gives rise to the benefits does not occur entirely during the marriage, a proportionate share of the benefits is community property based on the time under the plan during marriage and not on the contributions made to the plan during marriage. The time rule applies to defined contribution plans as well as defined benefit plans. See subdivision (a) (1). It should be noted that the time rule does not distinguish between the time the employee was domiciled in this state and the time the employee was domiciled outside the state, for the purpose of identifying "quasi-community property." All efforts during marriage are deemed to contribute to the community interest in retirement benefits.
-4-
Subdivision (b) also makes clear that the community interest in an employee pension benefit plan extends only to payments and refunds actually made under the plan to the employee or the employee's beneficiary or estate. The community interest does not include contingent benefits that are never actually paid under the terms of the plan. However, if substitute payments are made on behalf of the plan by the Pension Benefit Guaranty Corporation or another entity acting as guarantor for the plan, the community's interest includes a proportionate share of the payments actually made.
Under subdivision (b), the community interest in an employee pension benefit plan is not limited to retirement benefits, but includes death and survivor benefits as well, together with any other payments made under the plan. This overrules Benson .!:.. City of Los Angeles, 60 Cal.2d 355, 384 P.2d 649, 33 Cal. Rptr. 257 (1963), and cases following it Which held that the interest of the nonemployee spouse in an employee pension benefit plan terminates upon the death of the employee spouse.
368/263
Transitional provision
SEC. 5. This act applies to all employee pans ion benefit plans in
existence on January 1, 1986, and thereafter created, except in the
following cases:
(a) Division of an employee pension benefit plan on or after Janu
ary 1, 1986, pursuant to proceedings for dissolution of marriage or
legal separation commenced before January 1, 1986, is governed by the
applicable law in effect at the time of commencement of the proceedings.
(b) Disposition of an employee pension benefit plan on or after
January 1, 1986, in proceedings on the death of married person Who died
before January 1, 1986, is governed by the applicable law in effect at
the time of death.
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